Client only markets' update
Posted by jdavis on March 16, 2011
Did you get a chance to watch Inside Job? I went to see it a couple of weeks ago. It is shocking yet I was not shocked.
I see that the US Authorities have decided not to go after investment banking companies who flouted a Rule known as 105. To have done so clearly would have found the accused guilty and it would have brought the whole fraudulent banking edifice down. Then we could get on with our lives in a stronger and more stable growing economy. C’est la vie.
Earlier today, the market touched 1250. This is, so far, a fall of 7% from the February high. It also takes the market back to December levels. Of course, everyone and his dog has been shouting loudly since about then that you absolutely must buy stocks and shares. At those levels? No thank you.
The market is still in downtrend. I have been saying for quite some time that the indices were at ridiculous levels and way out of kilter from reality. As I have said to every single client during our review meetings, since December, the reality is that the global economy is at a precipice.
To reiterate, these are the global level risks right now:
- European state bankruptcies (like Greece and Ireland last year). The leading candidates are Portugal, Belgium, Italy and Spain
- Middle East despots being toppled
- Japan’s earthquake and tsunami and nuclear facilities
In fact, the primary reason for the absurd rise in the stock market, since September, has been the US Federal Reserve printing money like there is no tomorrow. This is inflationary and drags down the $ and boosts commodities and share prices. As I see it, this was the only thing keeping markets up. The only thing. It was hardly the US or the Global economy which are both in dire straits, as we are and just like most countries.
The problem is what happens when they stop printing. There will be nothing holding the market up. This is the question the markets are ruminating on right now. Markets are not falling because of Japan (our thoughts go out to the East). They’ve been falling since Mid February. They are falling because there is an infinitesimally change of tone amongst US politicians who are just beginning to question the benefits to the economy of money printing, for which they made up a new term, namely, Quantitative Easing. There are no benefits to the economy. It helps Wall St (Canary Wharf) only.
Add on the global level risks and you have a market that is increasingly likely to fall hard this Spring/Summer, like last year. There are those, whom I respect, who say we have seen the top for years or within a few percent of the medium term top.
For the short term, I put it at 1 in 4 that we will go back to the February high and exceed it. I put it at even lower probability than that that it exceeds and carries on rising. However, I believe the only way that can happen is if Ben Bernanke (Chairman of the Fed) is allowed to print more (ie QE3). We should know by June. Until then, what is likely is a trend down to much lower levels this Spring/Summer. Even if we do rise back and exceed February, my view is that there will still be a big fall in markets over the next few months.
We recently added to our Agriculture and Precious Metal holdings however any net falls from these (after the initial rises) will be balanced by the inverse holding which is doing its job now. If markets really tear down then the Eclectica Absolute Macro fund would be expected to rise in double digits too. I remind you that this strongly bearish fund has been flat for the last 6 months while the market has surged. This is most encouraging.
Hence, why we say that our client portfolios are broadly neutral whatever the markets do, in the short term.
Again, with a sizeable fall we would likely reduce or eliminate holdings in the Inverse and Absolute Macro funds and buy into markets at significantly lower prices, still with the aim of arriving at long term portfolios as we wish them to be but can’t get there while prices were just plain silly or had already risen so fast. We don’t buy high.
I contemplated a reduction now in the Inverse fund however I am not inclined to recommend one, based on previous comments. If however anyone wishes to reduce risk then, by all means, discuss it with me. I hasten to say all our portfolios are derisked already. If the market does fall, as I suggest, then by reducing the Inverse fund you would actually be increasing downside risk.
As ever, I hope this is clear. If ever you have any queries please do not hesitate to contact us.